Usually I cringe when our leaders in Washington try to help improve our finances. I’m afraid their efforts may do more harm than good. But two new ideas being discussed inside the Beltway could actually make it easier to prepare for retirement. Both center on the income you’ll generate from your 401(k).
First, in January, the Obama administration said it wanted to promote the availability of annuities in 401(k)s and similar plans. Only 22% of such plans now offer them.
This initiative isn’t as detailed as some annuity ideas that have been floated. But as long as annuities are not mandatory — or laden with onerous fees — I favor the notion of making them an option since they would allow more workers to turn some of their nest egg into guaranteed income for life.
I agree with the concept: We should encourage people to focus on the income their 401(k)s might generate, rather than their balances. But it seems to me you’re better off knowing how much income to expect if you keep saving until you retire. That’s the approach Social Security takes with its annual statements.
How long it will take for these initiatives to get through the legislative and regulatory process is anyone’s guess, but in the meantime you can put the concepts into practice in your own planning.
If you’re near retirement, see how much income your savings would yield through an inflation-adjusted immediate annuity. You can find a calculator that will provide such a figure by Googling “Vanguard Lifetime Income Program.” Then combine that figure with your Social Security benefit, which you can get from the Retirement Estimator at ssa.gov.
If you think you’ll have trouble living comfortably on the sum of these two figures, you may want to think about postponing retirement.
If you’re years from retiring, see if you’re on the right path. Many 401(k)s offer tools that project income given how much you’ve saved, how much you’re contributing, and how much longer you plan to work.
In either case, you’ll get a decent sense of how much income you can expect. And when it comes to gauging your preparedness, the feds have it right: Income’s the thing.